Mix Tape, 1/8/09: Retail Edition

In light of many retailers releasing their December sales numbers Thursday, I decided to focus this edition of 'mix tape' entirely on retail.

Speaking of retail here is a chart from the WSJ breaking down sales at various retailers over the month of December, and here is a link to another article discussing retail sales over the holiday season (WSJ). Something you should keep in mind when you review the results is that many retailers used extremely deep discounts to lure customers into stores, so from an earnings perspective a % increase produced far fewer profits than it did in the past and an earnings decline generated a far greater loss.

We won't know the real nature of the holiday shopping season until the earnings results are released, and they'll probably be worse then the same store sales numbers indicate.

Looking at the results I'm not surprised that GameStop (GME) produced strong results because of the levels of anticipation that surround hot video games (or just ones a particular gamer enjoys), thus giving even the most cash strapped gamer several months to get their money together to purchase it. When you consider the fact that many gamers often spend several months online discussing various video games, looking at early screen shots, reading interviews with the developers, etc, it stands to reason that they're going to find a way to purchase the game when it's released.

When looking at Wal-Mart's (WMT) results it's important to first remember that roughly 2/3rds of their sales come from groceries, pharmacy and every day household items like laundry detergent, as a result their sales are primarily an indicator of every day household related spending. This suggests that their recent sales result aren't so much a function of people cutting back on spending, as they're a function of people using Wal-Mart's deep discounts to meet their needs as opposed to purchasing more items overall. Let's not forget that over the weekend of Black Friday there were customers in the early morning lines to purchase things like paper towels and laundry detergent, suggesting that many customers are struggling to meet their basic needs.

In other words Wal-Mart's recent sales results are a function of their deep discount in addition to people cutting back on spending in general, however if/when the economy worsens and more people are driven down market I wouldn't be surprised if things pick-up later on in the year. As I've theorized in the past Wal-Mart's relative strength compared to other major retailers has been their grocery and pharmacy businesses, and a weak economy is likely to drive more and more consumers to them.

Furthermore if we see some bankruptcies or liquidations in the grocery or pharmacy space (as I suspect we will), Wal-Mart could also see a sales uptick from an influx of new customers from failed competitors.

In what may be the first of many retail closings/bankruptcies/liquidations Goody's Family Clothing a small regional retailer in the Southeast is being shuttered and liquidated. Granted it's not like this retailer is on par with say Kohl's (KSS) or JC Penny (JCP) in terms of size, however the chain did have 10,000 employees, and there are jobs with suppliers, vendors, etc, that depended on those jobs, the impact to local economies, etc. When you consider that there are dozens of small regional retailers and/or larger struggling ones that will probably fail this year, the aggregate impact will probably be fairly significant.

Aside from the obvious around retail employment, mall operators, etc, I also suspect that manufacturers will suffer from this trend, even if they remaining retailers pick-up the slack and enable the manufactures to sell products at similar volumes. The reason being that selling X number of goods to say 10 smaller regional retailers allows you better margins then selling the same number of goods to say Wal-Mart or Best Buy (BBY), as the larger chains have greater pricing power via the leverage they can exert on manufacturers.

Apropos of the above Macy's (M) is expected to announce the closing of 10 stores, and many retailers are going to Mall operators and demanding better lease terms. It goes without saying that the problems in retail are likely to spread to mall operators, and some of the new shopping centers and mixed-use retail development projects as well.

Now one of the obvious conclusions that many will draw from predicted rash of retail closings is that it will push people to shop online more. It's a conclusion I agree but not just for the obvious reason of fewer Brick & Mortar stars, but due to the fact that the remaining stores are likely to offer a more narrow selection. When CompUSA was around I would sometimes purchase things like Hard Drives, Video Cards, etc, from them because they had a better selection of PC components then competitors like Best Buy or Circuit City (CCTYQ.PK).

Needless to say I now buy my Video Cards either online or from local PC specialty stores now.

This (of course) creates an opportunity for specialty stores that can serve niches that will be ignored as retailers close, consolidate, etc.

Disclosure: at the time of publishing the author didn't own a position in any of the companies mentioned in this article; the ideas expressed are solely the opinions of the author and shouldn't be viewed as financial or investment advice.